Rolls-Royce share price resumed its strong rally and jumped to its all-time high of 598p on Friday. It has jumped by over 1,500% from its 2020 lows, making it the best-performing company in the FTSE 100 index. This rally has brought its market cap to over £50 billion, making it the 15th biggest company in the UK.
Strong demand across the board
Rolls-Royce stock price has jumped as investors focus on the strength of its business across all segments.
The civil aviation sector is doing well as the number of flying hours continue rising. Indeed, many aviation stocks like United Airlines, Delta, and IAG are some of the best-performing companies this year.
Rolls-Royce is also seeing robust order intake from some of its top companies as demand for wide-body engines rises.
The defense segment is also firing on all cylinders as the rising geopolitical tensions rise. Most countries, led by the United States are boosting the amount of money they spend in procurement. This trend will continue in the coming years as these geopolitical tensions rise, which will help its transport, combat, and submarines business.
The company’s power business is also thriving, helped by the ongoing demand from data center companies and utilities. Rolls-Royce will be one of the top beneficiaries as companies and governments embrace nuclear energy. It is working on small modular reactors in the UK.
Therefore, this rising demand, coupled with the ongoing cost management strategies, have helped the company do well in the past few quarters
Turnaround is going on well
The company hopes to become a more profitable firm in the next few years. Its mid-term target calls for its operating profit to move to between £2.5 billion and £2.8 billion by 2027, a big increase from the £1.6 billion it made in 2023.
Rolls-Royce also hopes that its operating margin will increase to between 13% and 15%, while its free cash flow will be between £2.8 billion and £3.1 billion.
There are signs that the management will achieve these goals ahead of schedule. Its civil aviation operating margin rose from 2.5% in 2022 to 11.6% in 2023. It hopes that the margin will get to 15.17% by 2027.
The defense segment’s margin is expected to move from 13.8% to between 14% and 16% by 2027. Also, the power systems division is making progress to achieve its 12-14% margin target.
Rolls-Royce share price has also done well as the company slashes costs and expands to other areas. It has already shed thousands of jobs in the past few years and sold some of its less profitable divisions. The company is also slowly moving to the more lucrative narrow-body aircraft engines.
Still, there are some concerns about the company. There are still supply chain challenges in the defense business. Also, there are concerns about its pricey valuation since the company trades at a high premium.
Its current market cap of £50 billion implies a 17.8x forward 2027 operating profit, which is relatively higher than its historical levels.
Rolls-Royce share price analysis
The weekly chart shows that the Rolls-Royce stock price has been in a strong uptrend in the past few years. It crossed the important resistance level at 443p, its 2023 highs and its previous all-time high. The stock has jumped above all moving averages, a sign that it has momentum.
By measuring the depth of the cup pattern, and extending it from its upper side at 443p, we estimate that the bull run could see it jump to 847p, which is 44% from the current level.
The key risk is that the stock has formed a rising wedge pattern, a popular reversal sign. Also, there are signs that the MACD and the Relative Strength Index (RSI) have formed a bearish divergence pattern.
Therefore, the most optimistic view is where the stock rises to 847p in 2025, while the pessimistic view is where the divergence patterns pushes it to 443p.
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